The False Sense of Security Behind Corporate Debt

Debt has been cheap and plentiful, but companies may also have been encouraged to borrow by high and rising stock prices. Steven Blitz, U.S. economist at TS Lombard, thinks public companies and their lenders have gotten too comfortable with high equity valuations when thinking about debt levels, rather than focusing on income or cash on hand. This is a bit like mortgage lenders relying on home values rather than households’ ability to repay, even if public corporate equity can’t literally be used as collateral in the way homes are.